Is Money Smart in the Korean mutual fund marketplace?
In this paper, we examined the smart money issue with Korean mutual fund data. The smart money hypothesis states that investor money is "smart" enough to flow to funds that will outperform in the future, that is, that investors have genuine fund selection ability. Gruber(1996), Zheng(1999) and Keswani and Stolin(2008) document that indeed investors make good decisions, that is, money is "smart". However Sapp and Tiwari(2004) find that this "smart money" effect no longer holds after controlling for stock return momentum. To examine the smart money controversy, we employ a Korean data set(January 2001 to May 2008) of monthly fund inflows and outflows differentiated between individual and institutional investors. Our data allow us to conduct a stronger test for the smart monet effect by using monthly data on exact fund flows, and to gain greater insight into investors' decisions by considering separately the buys and sells of individual and institutional investors. Using Carhart(1997)'s four-factors model and Keswani and Stolin(2008)'s methodology, we analyze empirical relationship between fund's risk-adjusted excess return and fund flows. The results are we can't find such evidences of smart money effect in Korean mutual fund marketplace. But the result from the trading strategies confirms adverse Zheng(1999)'s information effect, that is, investors can beat the market by investing in negative money flow, low money flow and large funds.
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